Several Items on Banking Reform

by Chris Sturr | June 11, 2010

Some items on banking reform, which is still in reconciliation: According to the Wall Street Journal and other outlets, Democrats are sparring over Blanche Lincoln’s derivatives provision (which would bar banks from derivatives trading, requiring them to spin off their divisions that trade in them).

Here’s an article at HuffPo by Robert Pollin of the Political Economy Research Institute and SAFER about the importance of regulating derivatives, and why speculation in commodities futures is a special concern. A tidbit:

[P]robably the most contentious issue outstanding will be how to regulate the markets for derivative financial instruments. Financial market derivatives include many of the esoteric Wall Street inventions that led to the near collapse of the U.S. and global financial system in 2008-09, including subprime mortgage-backed securities and credit default swaps. Other types of derivatives include what had once been plain-vanilla options and future contracts for commodities such as oil and food, that farmers and others have long relied on to help maintain stability in their business operations and plan for the future. But deregulation also converted these derivative markets for basic commodities into gambling casinos, which led to the severe price swings in 2008-09 that destabilized businessand household budgets in the U.S. and throughout the world.

Here’s the rest of Pollin’s article.

According to another HuffPo article, Thomas Hoenig, the president of the Kansas City Fed, favors stronger derivatives regulations than the Obama administration is calling for.

Jane D’Arista, also of SAFER, has also weighed in on the topic at The Baseline Scenario, the blog run by Simon Johnson and James Kwak. And here is a pdf of the letter the SAFER economists sent to the reconciliation committee.

And here is a statement from Mary Bottari of the Center for Media Democracy and BanksterUSA, with steps you can take to push for Section 716 of the banking reform bill (the part that would regulate derivatives). Details:

Casino Banking
Currently the five largest banks in the United States have an anti-competitive strangle-hold on 90 percent of the U.S. swaps and derivatives market worth some $300 trillion. The five banks are Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup and Bank of America. These five bank-dealers can fund their swaps trading units with FDIC-insured deposits. They have access to the Federal Reserve’s discount window, which allows them to borrow money for gambling in swaps at near-zero percent interest rates. But these government supports were created to reassure the public that their deposits are safe, and to protect banks from runs on their deposits –- not to help banks finance their own casinos.

Play with Your Own Money, Not Ours
Sec. 716 of the Senate bill contains a ban on federal government assistance to any swap entity. In effect, Sec. 716 will require the five largest banks/swaps dealers to spin off their swaps desks into a separately capitalized affiliate – in other words to Wall off the casino from old fashioned banking. The measure is geared entirely towards preventing a situation in which taxpayers would once again be liable for the bad bets of big banks. Sec. 716 would ensure that private sector institutions alone are responsible for these risky trades.

See the rest of the post, including details about what you can do, the House and Senate Conferees you can contact, etc.

—Chris Sturr

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